RBI is exploring the possibility of interest free banking in India to improve financial inclusion.
According to Annual Report released by RBI:
“Some sections of the Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest-free banking products in India in consultation with the government”
What is interest free banking and how is it possible?
Interest free banking is followed by Islamic Banking. Islamic Banking follows principals of islamic laws in which taking and giving of interest is treated as sin. So, in islamic banking with the repayment of loan, profit is shared by the borrower with the bank if he earns profit and in case there is loss, loss is to be shared by the bank with the borrower. For consumer loans, instead of extending cash loan, bank buys the product and give it to the consumer (borrower) on lease and earns rental.
It is to be seen that how this model will work in India as any further details are yet to come out.
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